(Agencies)
Updated: 2008-04-22 14:55

Global carmakers' love affair with the booming Chinese market is still going strong, but many are bracing for a new stage of competition that will require offering better fuel economy and smaller cars -- both recipes for slimmer profit margins.

Only a few years back, foreign carmakers mostly offered their largest and priciest sedans here, slapping a 'China premium' on the price tag to boot, as wealthy Chinese mimicked US consumers' preference for big, gas-guzzling cars.

But a doubling of crude oil prices in the past couple of years has sparked a worldwide shift towards smaller, fuel-saving cars -- a phenomenon that China is also embracing.

"The trend towards small vehicles is global," Wang Fengying, president of sport utility vehicle maker Great Wall Motor Co told an industry conference on April 18 ahead of the Beijing Auto Show.

The SUV and pickup truck maker plans turn its focus on the small car segment to ensure it keeps growing, even aiming to lead the industry in the field, she added.

Nick Reilly, General Motors Corp's vice president and head of its Asia Pacific operations, said the US automaker also had its sights on smaller cars after climbing to the No 2 position in China with high-end sedans and SUVs.

"Most of the growth will occur in the mini to lower-medium segment," he said.

Other top auto executives -- all due to descend on Beijing this weekend for what has become an auto show of international standing -- are likely to echo that view.

More small cars such as Toyota Motor Corp's Yaris subcompact expected to be showcased. The Japanese top automaker is due to begin producing the car in China later this year.

No matter how tough the competition, many global automakers still consider China to be the Promised Land, especially as they now face the prospects of a slowdown in the US and European economies.

After becoming the second-biggest auto market in 2006, China still has a lot of growth ahead, most forecasts predict.

After reaching nearly 8.8 million vehicles last year, the Chinese auto market is seen growing to 10 million units this year. Double-digit growth expected to continue at least over the next five years, exceeding projected economic growth of 7-8 percent over the same period.

The rate of car ownership in China is still just 44 out of 1,000 inhabitants, according to research cited by Magna International. That is just one-third of the global average of 120 per 1,000, and far behind 750 for the United States.

Home-grown brands

Still, competition will stiffen. In addition to an ever-intensifying price war among foreign makes, local brands are also stepping up. Product quality is improving and Chinese manufacturers are inching into upper segments in the hope of boosting local market share, as well as boosting their presence overseas.

So far, Chery, Geely and Great Wall -- the top three national brands with no foreign partnerships in China -- have managed only a 28 percent share due to their lack of offerings in the $20,000-and-above car segment, said Michael Dunne, managing director of research firm J.D. Power's China operations.

"That's almost a third of the Chinese market," he said, adding that the super-rich are by-passing the Chinese brands to opt instead for the Audis, Mercedes and other status symbols.

While not quite there yet, the 'Young Tigers', as Dunne calls the three local marques, are moving up in the price range. Chery has the A3 car priced at $13,700, more than double what its mainstay QQ sells for.

Geely will showcase its first sport utility vehicle, the NL-1, at the Beijing auto show, as well as the GC-1 mid-sized sedan in a departure from the no-frills, entry-level cars they are best known for.

"We're moving upscale," Geely Group vice president Frank Zhao said. The car maker plans to develop more than 40 models using 15 vehicle platforms by 2015.

Great Wall's Wang acknowledged that Chinese cars abroad still have a poor image as copy-cats with little creativity. Her company's top priority was to improve quality and step up technological innovation to join the ranks of international players.

"These are the biggest challenges facing us now," she said. "Many Chinese car makers, especially those with their own brands, are determined to go international. The coming years will be crucial for our growth and expansion."